Introduction of a new Tax Procedures Law (TPL) and Income Tax Law (ITL) in March 2023 and October 2022 respectively, has come up with the below significant changes to mention a few:
Developments under the new TPL
- Requirement to submit transfer pricing documentation (TPD) together with annual tax declaration. Under the transfer pricing (TP) guidelines, taxpayers are only required to have TPD ready before the deadline for submission of income tax declaration and they can only be submitted to the tax administration on request within seven days following the request from the tax administration. The new TPL now makes it mandatory to submit TPDs together with annual tax declaration, for any taxpayer who engaged in related parties’ transactions.
- Introduction of TP audits. This is a newly introduced audit type as in the past, TP audits were conducted as part of a comprehensive tax audit and Rwanda Revenue Authority (RRA) did not have the flexibility to only conduct a TP audit. The new TPL now grants that flexibility and therefore we are likely to see increased audits focused on TP and international taxation.
- Requirement to submit residence certificate of the payee for one to apply double taxation treaty (DTT) rates. Rwanda has signed a number of DTTs with several states. However, for the benefits of a DTT to apply, the new law now requires that the person seeking to apply the DTT rates should submit to the tax administration a residence certificate of the payee issued by the competent authority of the country in which the payee is registered and resident.
- Suspension of collection measures when tax not in dispute is paid. The new TPL provides that when a taxpayer has paid the undisputed portion of the tax assessed, the Commissioner General (CG) suspends the collection of the tax in dispute until the conclusion of the appeal logged in by the taxpayer. Under the old law, there was no provision authorising the CG to suspend the payment of taxes assessed, although the CG upon discretion would stay all collection measures on the amount under dispute following a request from the taxpayer.
- Setting off administrative fines with the amount owed to the taxpayer. Under the previous law, RRA would issue fines, penalties and interests to the taxpayer without considering the amount RRA owes the taxpayer in relation to VAT refund or accrued interests from excess tax paid to RRA or delayed refund to be made by RRA to the taxpayer. In order to have a fair treatment between RRA and the taxpayers, the new law has introduced the tax set-off principle where RRA will now consider the tax refund owed to the taxpayer before considering any administrative fines for late payment, administrative fines for understatement and interest for late payment.
Developments under the new ITL
- Exemption of dividend paid between resident companies from Withholding Tax (WHT). New ITL specifically exempts inter-company dividends paid to resident entities from withholding tax. The law extends further exemptions by stating that dividends paid between resident companies are excluded from CIT whether or not they are subject to WHT.
- Introduction of Advance Pricing Agreements (APAs). The new ITL introduces the possibility of a taxpayer entering into an APA with the tax authority. This new measure is welcomed as it will limit the number of TP disputes that have increased following the enactment of the TP guidelines.
- The use of fully paid up equity in thin capitalisation calculations. Under the new ITL, the provision specifically mentions that the equity listed in the balance sheet has to be fully paid for one to determine whether they are thinly capitalised or not. This means that if the equity presented in the balance sheet is not fully paid, the thin capitalisation calculation would consider only paid-up capital in determining the interest to be disallowed in the tax computation. Secondly, the new law also provides that any realised foreign exchange losses on interest disallowed as a result of the entity being thinly capitalised would equally be denied. In other words, it will form part of the disallowed interest. This also means that any realised foreign exchange gains associated with the disallowed interest will have a reverse impact.
- Under the new tax law, unrealised exchange losses are now non-deductible until they become realised and unrealised exchange gains are not considered taxable income until the gain is realised. This is different from how the treatment was as per the old ITL as unrealised exchange losses and gains were accorded the same tax treatment as the accounting treatment, in that unrealised exchange losses were allowable expenses and unrealised exchange gains were considered taxable income received.
For more information about those major changes and so many others refer to our tax alert for the new ITL and stay on the lookout for our coming tax alert on the new TPL.